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Oil dips below $111, heads for weekly gain

Oil prices slipped below $111 a barrel on Friday but retained the bulk of the previous session's gains, supported by stronger economic growth in China and supply concerns after U.N. talks with Iran failed and Algeria's hostage crisis continued.

Brent crude briefly edged higher after the United Nations said that nuclear inspectors had failed to reach a deal with Iran to unblock an investigation into suspected bomb research on Friday after two days of intensive discussions.

The absence of a breakthrough was a new setback for diplomatic efforts to allay international concerns over Tehran's atomic ambitions and avert the threat of a new Middle East war.

"There is always a probability of an agreement and even though it is small, the impact of an agreement will be high," said Thorbjoern Bak Jensen, an analyst at A/S Global Risk Management.

Front-month Brent was down 34 cents at $110.76 barrel at 1213 GMT, retaining the bulk of Thursday's $1.42 a barrel gain.

U.S. oil was down 14 cents at $95.35 a barrel, also holding on to the bulk of the previous session's $1.25 gains.

Brent is headed for its third weekly gain in four, while U.S. crude is poised for its sixth weekly gain.

The West's main energy agency said upward pressure on prices could continue as rising Chinese fuel demand increases and falling OPEC supplies are tightening world markets and draining inventories.

"All of a sudden, the market looks tighter than we thought," the IEA said. "OECD inventories are getting tighter - a clean break from the protracted and often counterseasonal builds that had been a hallmark of 2012."

More immediate supply concerns from the hostage crisis in Algeria also continued to offer support, as the fate of those held by Islamic militants who seized a gas facility in OPEC producer Algeria remained unclear.

French Prime Minister Jean-Marc Ayrault said on Friday the Algerian government had told him operation to rescue hostages was still ongoing at mid-morning.

Analysts said the end of year spurt driven by infrastructure spending and a jump in trade could signal a stable growth path.

"The China data was largely in line with expectations and that's reflected in the oil markets. At the moment, it's steady as it goes," said Ric Spooner, chief market analyst at CMC Markets in Sydney.

"The broad demand outlook is for moderate growth so markets should be generally preparing to improve, although for Brent, the upside may be limited by adequate supply."

China's fuel consumption in 2012 experienced the slowest growth since 2008, but beat forecasts by the International Energy Agency (IEA), and demand growth is expected to accelerate this year as the country's economy recovers.

Implied oil demand in 2012 in the world's second-largest fuel consumer rose 4.5 percent, or 420,000 bpd on the year, according to Reuters calculations based on preliminary government data, beating the IEA forecast for growth of 3.3 percent, or 301,000 bpd.

China's numbers added to optimistic sentiment after a sharp drop in U.S. unemployment claims and a surge in residential construction helped boost investor confidence on Thursday.

Asian and European shares all rose on Friday, while the dollar index was up by 0.25 percent. (Additional reporting by Manash Goswami and Ramya Venugopal; editing by William Hardy)